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Margin surprise, volume growth to recover graduall

* MRCO’s 1QFY23 earnings were in line on the volume, sales, and gross profit front, but surprised positively at the EBITDA and PAT level. The margin base gets less challenging from 2QFY23.

* The company is witnessing less intense margin pressures as compared to its peers. Over an FY22 base, it is likely to report an EBITDA and earnings growth of 15-16% CAGR over FY22-24. We maintain our Buy rating.

Sales and gross margin in line; EBITDA margin ahead of our estimate

Consolidated

* Consolidated net sales remained flat YoY at INR25.6b (inline) in 1QFY23. EBITDA grew 9.8% YoY to INR5.3b (est. INR4.9b). PBT grew 6.9% YoY to INR5b (est. INR4.7b). Adjusted PAT grew 4.2% YoY to INR3.7b (est. INR3.5b)

*  Consolidated gross margin expanded by 400bp YoY to 45%. volumes declined by 6% YoY.

* Consolidated gross margin expanded by 400bp YoY to 45%.

* As a percentage of sales, higher staff (up 20bp to 6.1%), other expenditure (up 140bp to 10.5%), and A&P expenses (up 80bp to 7.8%  EBITDA margin (up 160bp YoY) to 20.6% in 1QFY23.

Standalone

* Sales declined by 3.3% YoY to INR19.8b, while EBITDA/adjusted PAT grew 12%/47.1% to INR3.8b/INR3.9b 1QFY23.

* EBITDA margin expanded by 260bp YoY to 19.3%.

Highlights from the management commentary

* Volume decline in 1QFY23 was below the management’s expectations. Saffola volumes declined by ~20% due to the high base of in home consumption.

* Excluding Saffola oil, volumes were marginally (1.4%) higher.

* Around 50% of the RM basket is witnessing a deflation. Hence, MRCO is less impacted by inflation v/s its peers. The management said it will be able to maintain its FY23 margin guidance, even with increased A&P spends.

* The third and fourth quarter has a soft volume base and should see good traction. The management expects to deliver double-digit value growth in 9MFY23

Valuation and view

*  Due to the more gradual than expected recovery in volumes and some price corrections taken to boost growth, we have cut our FY23 and FY24 EPS forecasts by 4-5%.

* Its earnings growth prospects are nevertheless healthy ~16% CAGR over FY22-24, with RoE of over 40%

* The much-needed diversification is gathering momentum in the Foods and digital-first brands. If sustained, this can lead to higher multiples for MRCO as compared to the past. For now, its earnings growth provides a safe haven v/s it’s Staples peers in an uncertain environment. We maintain our target multiple of 45x Jun’24E EPS to arrive at our TP of INR605. We reiterate our Buy rating on the stock

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